Why You Should Prepare Your Manufacturing or Distribution Company for Acquisition & 5 Steps to Get Started

Nov 30, 2023

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Nikki Wright, Managing Director of CBIZ Bernston Porter (https://www.cbiz.com/about-us/locations/company-details/cbiz-berntson-porter).

Why You Should Prepare Your Manufacturing or Distribution Company for Acquisition & 5 Steps to Get Started

The annual number of business mergers and acquisitions in the U.S. nearly doubled between 2000 and 2021. While economic challenges have slowed that pace a bit, 20,921 companies still undertook a merger or acquisition in 2022, down from 2021’s record total of 24,899.

In today’s environment, preparing a company to be acquired is a smart business strategy even when a business owner isn’t actively pursuing a sale. Just as business owners strategize how to grow the business or increase profitability, they should also consider potential exit strategies. While an acquisition may not be in a company’s short-term plans, being prepared helps ensure its ability to respond appropriately to an unexpected call from a competitor or investor group. Similarly, taking steps to prepare a business for a possible acquisition is an advantage when navigating management turnover, financing needs or regulatory changes.

5 Prep Steps for Business Acquisition

A five-step approach can help you define your objectives, identify your risks and value drivers, and, if you decide the timing is right, obtain a purchase offer that benefits you and the business.

  1. Build your leadership team.

Of course, having the right leaders in place is critical for day-to-day operations and growth. But as you hire and promote leaders, consider their long-term strategic capabilities. A business acquisition, merger or transition takes a leadership team that’s able to stay focused on the long-term objectives.

To prepare your team, include them in the strategic planning process. Make discussions about how to handle potential acquisition opportunities a regular part of leadership meetings. Determine criteria that would make selling or merging the business appealing. Discuss objectives, timelines and optimal outcomes. Most importantly, revisit your objectives and plans with the team as your personal situation or business environment changes.

  1. Organize your financials.

One of the first things a prospective buyer will want is a detailed financial picture. In-depth financial reporting also makes it easier to determine the value of your firm. No matter what your timeframe is for pursuing an acquisition, it’s a good practice to put GAAP financial processes in place so that you’re able to provide an in-depth look at past, present and future financial performance.

In addition to standard financial reports, such as your balance sheet, profit and loss statements, and tax records, you’ll want to provide present and future cash flow projections that demonstrate your company’s anticipated revenue and expenses. Be prepared to also provide reports on your current customer base and market position, as well as the business’ organizational structure, including operations, financial and human resource teams.

  1. Determine the value of your operations.

Solid, ongoing financial practices will help you determine how much your company is worth so you’ll recognize if an unexpected offer is fair. Calculating your valuation provides an estimate of the economic value of your interest in the business. When assessing your company’s worth, you’ll want to put an objective value on things like your customer base, equipment, inventory, manufacturing or distribution processes, intellectual property, trademarks and strategic partnerships.

  1. Explore alternative structures.

Preparing for an acquisition must include considering the different transaction options available. By evaluating options ahead of time, you’ll be able to determine which is the best fit at any given time. There are two primary ways to structure a business sale. An asset sale enables you to transfer the business’ assets to the buyer. A stock or equity sale structure enables the buyer to purchase your share of the business, including all the company’s assets and liabilities.

The tax implications for the business and all its owners are a major factor when choosing which structure makes the most sense. In general, equity sales are simpler, with lower capital gains tax rates for the seller. However, buyers may prefer the asset sale structure because they receive tax breaks related to the valuation, depreciation and amortization of the assets that aren’t applicable in an equity sale.

  1. Seek expert advice.

Whether you’re considering selling your business in a year, five years or somewhere down the road, you shouldn’t tackle the preparations on your own. Assemble a team of advisors you trust, including accounting, tax and legal experts, who can support your ongoing needs and assist in preparing your company for acquisition. As you get closer to your target sale date, you’ll want to engage specialized banking, valuation, insurance and real estate advisors to help you finalize your preparations and navigate the sale process.

The manufacturing and distribution industry experts at CBIZ can provide the resources and guidance you need throughout the acquisition process, from preparation through sale. Connect with a member of our team and gain access to more resources here.

This article includes input from Seth Goldblum, Senior Managing Director of CBIZ Private Equity Advisory, and Cole Harris, Tennessee Business Unit President of CBIZ Employee Benefits. Together, their teams provide benefits solutions and expertise in business combinations, merger integration and executive counsel.

If you have questions relating to the content of this article, Nikki Wright would welcome the opportunity to answer them. She is also available to answer questions related to privately held company accounting issues. Ms. Wright can be reached at (425) 289-7626 and  Nikki.Wright@CBIZ.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.